Certainly finance is as corrupt and corrupting as a society allows it to be. At the same time finance or some equivalent is inevitable in any reasonably complex culture. It is needed to direct resources to worthwhile activities. The "technology" of trade has varied with time and culture, approaching but nowhere achieving, the goal of making the incentives encourage fair and honest dealing.

Successful systems have seemed to exist for long periods of time and the current "western civilization" model really isn't all that bad. It's mechanisms for accommodating changes in conditions are unfortunately a weak point with too much profit from manipulating the rule making system.

Clearly, eternal vigilance is the price of liberty in this as well as much else, thank you for watching your areas of interest and watching out for those using thermite on the train tracks.

From where I sit, though, the two cultures are "people who believe in finance" and "people who think finance is a corrupt and corrupting force in the world." All the interesting nerds I know make art, and all the interesting artists I know nerd out on technology. But the one thing that seems to separate us into two camps is whether we think the world of finance is a giant con game or a legit enterprise.

For the last few years I have found most new technology to be uninteresting. At first I thought it was because of depression, but recently the realisation hit that a lot of the new stuff out there are just for the purpose of the creators and funders to get rich quick.

As a person who fints money to be an annoyance at best I want to find the magic in technology again. I want things to be for the good of the community rather than companies exploiting people and their metadata. I would hate it if I ended up as a technology hating luddite*, and I am trying to fight against it. It's just that the neo-liberals are making that hard.

*Having said that, deliberate sabotage of the day to day running of big data companies would not be a bad thing.

That's just blatantly false, even as an oversimplification. Modern finance depends on the ability to structure an arrangement so that all parties feel they benefit. There's no scarcity of US government bonds, but they remain the safe financial instrument of choice because even at near-zero interest people feel they benefit from the guaranteed return. And so on.

Beware your (over)generalizations. "All the interesting nerds I know make art" - you just called me uninteresting. Or perhaps I'm not a nerd. Or perhaps your definition of art is different from what I think it is. Still, statements of the form "All X..." probably are best restricted to logic theorems and not assertions about people.

Actually, yes, though I'm mostly using our personal acquaintanceship to make a point about salience and overgeneralization. I've heard people say "I don't know any gay people" or "I don't know any devout Christians" when both things were demonstrably false. Cory also knows I worked in finance for many years.

The point I take from the blog post is one I might generally agree with, but it's overstated. Yes, there are people who think all finance everywhere is evil and corrupting, and there are people who think finance is some kind of infallible religion. Each of those groups is probably something like 10% of the population. I don't think it's useful to try and draw a bright line that distinguishes maybe 20% of the world and leaves out the other 80%.

...Modern finance depends on the ability to structure an arrangement so that all parties feel they benefit.

I don't think we can let modern finance off the hook that easily. Many "parties" to these "arrangements" are coerced and/or deceived into participating. Therefore the standard that a party "feel" they might benefit is completely inadequate.

In the housing crisis and subsequent Great Recession of 2008-9, anyone who had a mutual fund or 401k was a (nominally consenting) participant. After all, we'd signed the check that deposited our money in the mutual fund, right? Well, no. Consent on the basis of deception is not informed consent. And when the deception goes far, far up the advice chain; when the advisors of the advisors of the advisors all believed the bullshit about Grade A tranches of mortgage-backed securities, you cannot turn around and blame the victims for their consent.

Consider that finance is both a vital and necessary part of a modern economy, and a gigantic con game. The practitioners provide enough benefit so that some fraction of the economy can't survive without them. But they obfuscate and monopolize the system so thoroughly that alternatives could never emerge and survive. That gives the practitioners the freedom to rake in gigantic (and more to the point -- not optimal on a system-wide basis) profits.

Any time there is a big technological shift, economic and political forces are disrupted and need to realign in some new pattern, usually over several generations. There will be new winners and losers. We are in such a phase now, mostly based on communications and information technology. You don't get to turn back the clock. We need to figure out how to more equitably handle the reality of this change, so good people need to pay attention. Globalization, for instance, has both very good and very bad aspects- good information and open communication is key to making good long term choices.

Finance isn't good or bad, it's just a collection of social technologies that need to be managed. But there is a problem of asymmetry of information, and in many cases deception, in finance. In that and many other areas of life- medicine, aircraft design, product safety- we create governments and regulatory structures that hopefully keep the majority of us safer. We've gone off the rails in that respect with finance, as the technology outran the societal controls.

A modern society needs a financial sector to lubricate the economy. But if it becomes too large, as ours did, and if its main focus becomes speculation and gambling rather than investing in actual productive creation, as ours did, then it becomes a drain on the society. You can't base an entire economy on casino gambling- somewhere, someone has to make something. Real wealth is not money, it's what people make.

Technology can be a force for decentralization- I'm an example of that. I'm half of a two person entrepreneurial business that for the last 15 years has been responsible for designing and producing sophisticated electronic instruments/ embedded systems (real job creators!). When we started our careers in the early 70's this kind of development would have required a large company- and even now we compete successfully against pretty big firms. I sometimes describe what we do as a kind of family farm that grows technology. The information revolution filtering down to the level of making actual things is pretty exciting- and destabilizing. It can be very empowering to individuals.

Your original assertion had to do with "artificial scarcity". Now you've jumped to the housing crisis, which was caused by artificial inflation of supply, both of housing and of the money to buy houses. That's what bubbles are about. If you'd like to stick to one assertion we can debate it, but playing whack-a-mole is going to get dull quickly.

If your argument is that "finance contains deceptive elements" and "the Great Recession was caused by a horrible conflation of greed and deceit" you won't get any argument. But that's a far distance from your initial condemnation of the entire notion of modern finance.

You then jump back to "finance is ... a gigantic con game." That's true on the level that any purchase and sale is a con game, whether it's autos, beauty products, computer hw, enterprise sw, etc. Find me something that distinguishes the sale of financial assets from other forms of sale and I might nod back.

Likewise, the assertion that "alternatives could never emerge and survive" lacks any notion of "alternatives to what?" Are you talking about crowdfunding? Microtransactions? Alternative currencies? Community banking? Peer-to-peer loans? To my estimate, finance is one of the most innovative areas, in which many alternatives emerge, some to flourish.

Your original assertion had to do with "artificial scarcity". Now you've jumped to the housing crisis, which was caused by artificial inflation of supply, both of housing and of the money to buy houses. That's what bubbles are about. If you'd like to stick to one assertion we can debate it, but playing whack-a-mole is going to get dull quickly.

You are conflating my first and only posting (so far) with that of another poster. I agree that whack-a-mole is dull and unproductive, but "artificial scarcity" is not something I find plausible either.

awexelblat:

If your argument is that "finance contains deceptive elements" and "the Great Recession was caused by a horrible conflation of greed and deceit" you won't get any argument. But that's a far distance from your initial condemnation of the entire notion of modern finance.

You then jump back to "finance is ... a gigantic con game." That's true on the level that any purchase and sale is a con game, whether it's autos, beauty products, computer hw, enterprise sw, etc. Find me something that distinguishes the sale of financial assets from other forms of sale and I might nod back.

For me, the distinguishing feature is the long and dubious chain of information provenance on the financial side. Since you mention autos: when I go searching for a new car, I crack open Consumer Reports. Now, not only does CR have a reputation for honest dealing, a reputation they have clear incentives to maintain, but they buy the damn cars themselves, they drive them, and they examine them in their own garages. The buck stops after pretty much one link in the chain. Compare financial advice where there is no shortage of advice and advisors, but very little taking of responsibility for that advice.

awexelblat:

Likewise, the assertion that "alternatives could never emerge and survive" lacks any notion of "alternatives to what?" Are you talking about crowdfunding? Microtransactions? Alternative currencies? Community banking? Peer-to-peer loans? To my estimate, finance is one of the most innovative areas, in which many alternatives emerge, some to flourish.

Alternatives to a system that rewards with such obscene profits that corruption is inevitable. Why, for example, do you have to be a friend of the right broker in order to get in on an IPO? Isn't the "P" in IPO supposed to be "Public"?It would be a financial innovation if an IPO returned more money to the issuing company, and the insiders siphoned off less. But do I expect such an innovation to ever emerge from the current system? I'm not holding my breath.

The key word in awexelblat's statement was "feels." Variations in personal desires and circumstances are what trade is all about. (The fisherman trading his fish for the farmer's corn) There is always profit in manipulating perceptions and desires, so advertising and sharp dealing can increase your returns.

One reason horse traders and money lenders often get a bad reputation is that their profits are enhanced by information asymmetry. The social mechanisms to keep them honest (reputation, laws, etc) must be effective enough to keep their customers content.

I do think there are serious issues, sharp dealers skirting the edge of the law, liars, touts, shills and the like have become all too common at the highest levels. The worst people seem to get promoted, and they are not being controlled.

At the same time, education has not kept up with the complexity of the economy, most kids get a BS without knowing the difference between a stock and a bond. They should get that in high school, and basic poker playing should be a mandatory skill.

It is hard to know how to fix things, and fairly easy to avoid thinking about. I know I have for decades, and too many of the best people have avoided this messy and distasteful field.

the housing crisis, which was caused by artificial inflation of supply, both of housing and of the money to buy houses.

An artificial inflation of supply, but mostly the supply of financing, much less of housing. The creation of derivatives and the vast sums to be made on them drove Wall Street to demand an ever increasing supply of mortgages, regardless of quality. The large majority were refinances made on existing homes, not new construction. Since every dollar represented by an actual mortgage was leveraged up about 50 times by side bets made by the financial industry, that is where the house of cards was built- in finance. Ratings agencies and investment banks colluded to take advantage of the new technology to make vast sums without actually building anything. The housing bubble was real, but it would never have threatened the global economy but for the bubble in derivatives. It was the proximate trigger, but not the source of the crisis.

awexelblat:

Find me something that distinguishes the sale of financial assets from other forms of sale and I might nod back.

What distinguishes the sale of financial assets from most (but not all) other kinds of assets or services is extreme asymmetry of information. That's what makes people feel like they are being conned- and very often they have been right. Markets that have a great deal of asymmetry of information need effective regulation or supervision in order for non-experts to feel they are not being taken advantage of. In the Recent Events, even a lot of "experts" were deceived, often quite deliberately, about what they were buying. That kind of defines a con. And no, all purchases are not defined by taking advantage of someone in any kind of a con- most, in fact, involve people on both sides exchanging something they personally value less for something they personally want more, in full knowledge and with eyes wide open. That's what makes economies work. It's when that social contract is broken that we run into trouble.

A financial sector is necessary, and it should be innovative, but it can't exist as a free for all that looks a lot like a criminal enterprise- not if it is to serve the greater good, or even be sustainable.

Sorry, you're right. The structure of these comments makes the threads hard to keep straight and I had confused you with another commenter. Let me try to address the points you did raise.

the long and dubious chain of information provenance on the financial side.

I'm not sure who you think is on the raw end of this chain. The majority (both in terms of numbers and in terms of cash value) of financial transactions take place between entities that have their own substantial research and risk management arms. Sometimes they are idiots, or think they are smarter than everyone else (e.g. the London Whale) but in every case there is another entity that ought to be doing its due diligence.

There is (what I, a non-lawyer think is) substantial evidence that Wall St banks misled town- and city-sized entities both in the US and elsewhere into purchasing CDS that were crap, through means that included outright fraud. There have been several buybacks, payments, and settlements. But you seem to be concerned about the degree to which retail customers were misled into unsustainable mortgages. I'm not sure how that relates to any sort of Consumer Reports-like analogy, though I do think that the Consumer Financial Protection Agency is a good idea. I just don't see how "chain of information provenance" is relevant here.

Alternatives to a system that rewards with such obscene profits that corruption is inevitable

Again, refer to the list of alternatives I listed. Leaving aside the disputable allegation that obscene profits (whatever that might be) inevitably lead to corruption the question at hand is whether or not alternatives could emerge. I pointed to five examples of alternative financial structures; are you still claiming there are no alternatives?

(I'll address the IPO remarks in my next response; otherwise, this would get too long.)

Why, for example, do you have to be a friend of the right broker in order to get in on an IPO?

OK, I'm now going to drift over into financial wonkery. I have to start by saying that I am NOT a registered financial advisor, and that nothing I say should be construed as giving financial advice.

IPOs have a number of purposes, of which "raise capital for the issuing company" is only one. Others are "provide employees with an exit path/reward" and "give the company flexibility to make larger acquisitions with non-cash offerings." See for example Facebook's recent move.

IPOs are risky for buyers. Outside of bubble conditions and outliers such as Google, most IPOs don't significantly appreciate in the short term. Part of the point of pricing an offering is to extract the maximum revenue at offer. Thus they're offered high and often drop significantly in the days and weeks after offer. Again, see Facebook as a salient example. Someone who bought into the Facebook IPO on offer day would have lost a great deal of money compared to someone who waited two weeks and then went to eTrade and picked it up at half its IPO price.

IPOs also require a willing and ready contingent of buyers and sellers. These are entities that commit to put up millions of dollars to ensure that there are enough sales of the offering. If that doesn't happen, the IPO collapses. A good recent example of this is BATS's abortive attempt to IPO. (Full disclosure: I used to work for an entity that was part of the BATS group and I used to own some BATS shares. After the IPO collapse the holding company bought back my shares.)

In order to get entities to be willing to sign contracts for millions of dollars on an unknown and might-collapse-anyway-leaving-them-significantly-poorer deal, you have to offer them a discount. Thus, these entities get blocks of stock allocated to them at less than the IPO price. They, of course, hope to sell those blocks at IPO and make money. If that doesn't happen pain follows, and lawsuits. See again Facebook.

For all these reasons, and more I don't have time to write at the moment, I think that offering IPO deals to the general public is usually a bad plan. I agree that it's frustrating to watch entities that have millions make more millions on IPOs, but that's because we all remember the good IPOs and forget how those same entities lost millions on the last IPO that tanked.

As to the question of whether or not the IPO returns sufficient capital to the issuing company, that's a very individual thing. There are costs to structuring an IPO, not least of them doing the roadshow, doing the SEC dance, and lining up all those initial buyers. The entities (which are usually large investment banks with M&A arms) that can make this IPO circus happen are few and they get to command a high price for their services. They are the neurosurgeons of the financial world - neurosurgeons make a lot more than other surgeons and, I'm told, have similarly awful bedside manners.

There have been a lot fewer IPOs in the past two decades. Part of that has to do with the fact that IPO deals have tilted against issuing companies, part has to do with the fact that IPO deals have gotten harder to structure (due in part to capital flight from equities markets), and due in part to the rise of ETFs, about which more if you are really into this kind of financial wonky deep-dive. The bottom line is that companies have things like CFOs and boards of directors to help them evaluate whether taking the company public is a wise idea. If the responsible people decide it's a good idea then that falls into the category of "feels good to both sides" that I initially started talking about.

Ignorance is still bliss, I see. Let me just ask one thing: would you get in an airline that was uninsured? (AIG held insurance paper on 80% of the world's commercial air fleet when it was bailed out. Trust me, without insurance, no plane is going to leave the ground.) Never mind business expansion, mergers and acquisitions, or the construction of capital-intensive things like power plants or chip fab facilities. It's fun to make didactic assertions, but I suspect you'd be unhappy to live in a world without the things (big) finance provides, like reliable municipal water, power, and sewage.

I see people asserting this, but I find it hard to imagine a solid justification for more than the merest shadow of what we have today.

What else is the financial sector but a bunch of middlemen; a proliferation of otherwise pointless profit machines?

A financial sector allows for freer flow of capital. Money is a medium of exchange and a store of value, it isn’t wealth- it can only create societal good (or ill) when it gets to the right places and circulates. Getting capital into the hands of those who need it to do real things, like build factories to make goods, or clean up the waste from those factories, or develop new medicines or technologies, is a non-trivial issue. A healthy and well regulated financial sector can help a lot in solving that problem, and help us all be better off.

Ideally the financial sector should be tied to the real makers- the non zero-sum part of the economy. To the extent that it is instead focused on zero-sum activities, speculation, and gambling, it’s not serving the larger economy. Though it can make a few individuals very rich, it doesn’t grow the pie one bit.

There is no justification for financial services accounting for the share of GDP that it has assumed over the last few decades. This non productive growth resulted in a tremendous collapse that harmed a lot of ordinary people- people who had nothing to do with creating the problem. It was a direct result of new technologies enabling new methods of speculation in the absence of effective regulation. Really free markets, it turns out, can be really dumb.